Let’s skip the pleasantries today and get right into why I’m here. JP Morgan’s covered call ETF’s JEPI & JEPQ. These two funds have caused quite the stir in the investment world in the past few years and, I think for good reason.
In a strange way, these covered call ETF’s have bridged a rather large gap in the investing or trading community. Traders didn’t really like being called investors and investors would rather be broke than face association with trader scum. Sure, I’m being a bit over the top but I think anyone reading this would agree. No matter what camp you’re in, JEPI or JEPQ does likely fill a gap.
In today’s post, I’ll take a “shallow” dive into JEPI/JEPQ to explain how I use them and why I think they’re in a class all to themselves. Well, them and the other 100 covered call ETF variations that have sprung up, but you get my point.
Why JEPI & JEPQ is Making a lot of Sense
They’ve made options trading available to everyone by packaging them in that warm cozy blanket we know as ETF’s. Those opposed to options have always deferred to the old, “they’re too risky” party line. However, you may want to look up here. These ETF’s are unique in that they offer anyone, of virtually any account size, the advantages of options income. $100 or $100,000 it doesn’t matter, with these ETF’s we can generate a moderately consistent level of income right away.
Furthermore, those that trade options have long had a dilemma. One that has cost me a great deal of money but that’s a story for another day. And that problem was/is that if we wanted to participate in the options market we might have to purchase 100 shares of the stock. This could potentially mean committing way more capital to a trade than we ever really wanted to. All to collect what amounts to very little in the short run and even less compared to the risk.
Thus, by coupling the investment camp and the options camp, either party comes to the game with their preferred upside. Investors get the benefit of an asset that will grow, albeit less so than the underlying index, and they have the bonus of “snowballing” that investment through dividend reinvestment. Options traders accept a lower expense ratio when compared to the contract commissions and we get the relatively consistent income we’re aiming for anyway.
So I ask you, what’s not to like?
Ok, ok, for the sake of being thorough let’s conduct some rudimentary due diligence.
4 Year Returns
*Since JEPI is the oldest fund of the two I’m going to limit my focus just to them. This will make for less work on my end and will provide a nice start to conducting your own evaluation of either JP Morgan covered call funds.
For this example, let’s assume we purchased $10,000 worth of JEPI the first day Yahoo Finance has data for. June 1st, 2020. JEPI closed at $50.94 so $10,000 would have bought us 196.32 shares.
Not quite 4 years ago but it’s all the data that exists. Also, dividend reinvestment is not being calculated here. We’ll look at that next.
JEPI Performance without Dividend Reinvestment
| JEPI 4Y Price Appreciation | JEPI 4Y Dividends Paid | JEPI 4Y Total Return |
| $1,138.77 | $3,724.76 | $4,863.53 | 48.63% ROI |
Now let’s turn up the heat and assume we decided to compound those returns over the 4 year period. We will contribute additional capital in a moment to get an even more accurate picture of what might be possible.
JEPI Performance with Dividend Reinvestment
| JEPI 4Y Dividends Paid | JEPI 4Y Total Return |
| $5,891 | $7,027.65 | 70.27% ROI |
Well that’s starting to look considerably better. Let’s round out this discussion by looking at what I believe is the most realistic scenario of these tests. At least for those in a similar circumstance to my own.
JEPI Performance with Dividend Reinvestment & $100 Contribution per Month
| JEPI 4Y Dividends Paid | JEPI 4Y Total Return |
| $6,507.81 | $12,161.51 | 83.87% ROI |
Another jump in dividends and another total return boost. Keep in mind the 83% return is also assuming the additional contributions which brought our total investment to $14,500 rather than $10,000 for the previous two tests. Assuming my math is correct here that breaks down to an average of about 20% year over year in returns. Very impressive!
Of course, I’ll have to recalculate when more time allows because I kind of quickly whipped together a spreadsheet to tabulate everything and I’m thinking something is a little off. If you see something, let us know in the comments below.
S&P 500 Performance with Dividend Reinvestment & $100 Contribution per Month
This exercise wouldn’t be complete without comparing the results to a benchmark. I used Portfoliovisualizer.com to perform this assessment rather than my own spreadsheet since I was having doubts. I didn’t use Portfoliovisualizer.com for the JEPI data because they didn’t have information available until January 2021. Nearly a year after JEPI began trading.
| SPY 4Y Dividends Paid | SPY 4Y Total Return |
| $964 | $14,133 | 97.46% ROI |
Closing Thoughts
As you can see, unfortunately, JEPI failed to best the SPY over the time period. That said, I’m in know way reluctant to hold JEPI & JEPQ.
JEPI & JEPQ may actually perform better and provide even higher dividends should the market turn bearish for any length of time. The options implied volatility will probably increase which would simultaneously increase the dividends paid. Thus making for a more comfortable descent and the possibility of reduced drawdown.
In any case, I hope you enjoyed learning a little more about these two ETF’s. I’m currently holding both of them in my Roth IRA and am always pleased to receive that passive dividend income each month. As always, please conduct your own research or speak with a qualified professional prior to investing. These two ETF’s may prove to be less than favorable in the years ahead.
God bless,
Jeff
